The Blind Hand of the Market?

The question today is what to do in light of the fact that the accountings currently provided to individual investors are impenetrable. Most obviously, one would like penetrable accountings. Unfortunately, that is easier said than done. The question is how hard we should try to come up with penetrable accountings. Today, I argue that we should try real hard, as the alternatives are not happy.

We could no nothing and let things go on. After all, if it made economic sense to have better accounting, market forces would make companies have better accountings. Well, no. Market forces likely encourage a company competing with others for capital to provide comparable accountings. Market forces do not necessarily protect entire markets or investors as a class. The US saving rate is frighteningly low. Bad accountings, and the resulting distrust of the markets, particularly the stock markets, may be part of the problem.

One still might not care. Let people do stupid things. I’ll put my money in the bank or a mutual fund. But, if a rising tide raises all ships, even a smart loner could benefit from better markets.

Old Europe down under.

Another obvious solution to bad accountings is to have a government agency collect information and regulate prices. That seems like a non-starter in the US. Or we could go to the traditional systems in Europe and Japan, where most stock is owned by financial institutions and pension plans. These big investors can get the raw data, meet with management to get their insights into the data, and make their own analyses. In the US, mutual funds also could fulfill the financial intermediary role, so that individuals can more directly enjoy the kinds of long-term returns available for investing in the stock market.

In Europe, the trend seems to be toward US-style public capitalism. Here, because of the growth in pension investments, stock owned directly by individuals is not growing as quickly as in Europe, but still is a major part of the market. A return to old Europe seems unlikely.

Remember that the President still wants to privatize Social Security so as to let individuals buy stocks and bonds with their federal social security money. Think about what pressure this puts on accountings.

OK, that is my argument that we really should try real hard to improve the accounting information provided to individual investors. Tomorrow, we start trying to decide if that is feasible. Hint: I have no easy answers.

One Response to The Blind Hand of the Market?

That government will intervene to avoid a “race to the bottom”, which nobody wants, which serves nobody, but which is somehow an inevitable result of the game of proper self-interests, is a foundation stone for a new, scientifically driven, progressivism. That is, rather than a “greater good” argument, a justification based on self-interest and self-regulation.